Gold prices rise, LTV ratios shrink

The loan-to-value (LTV) ratios of gold loans have shrunk in recent months with the sharp rise in prices of the yellow metal. Customers have been prudent in availing of loans and are not borrowing higher amounts, say bankers.

“We could notice a decline in overall portfolio LTV due to an increase in gold prices and a conservative approach taken by the bank,” says Narendra Dixit, retail head at CSB Bank.

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LTV refers to the amount that a borrower gets against the gold’s value. In 2020, the Reserve Bank of India (RBI) increased the LTV limit for lenders, wherein it allowed them to lend up to 90% of the gold’s value, from 75% earlier.

However, with the sharp rise in gold prices, bankers have been careful about lending aggressively. Since June 2022, the spot gold price on the MCX has risen nearly 20% year-on-year (y-o-y). On April 13, MCX spot gold prices hit an all-time high of 60,616/10gm. International gold prices have also risen nearly 11% YoY in the same time period, according to data from Bloomberg.

With the rise in prices, the demand for gold loans has also increased — it has been steadily rising since June 2022. The rate of growth has consistently been rising as well. From 0.8% year-on-year in June 2022, the loan against gold jewellery surged to 20% in February 23.

Prolonged geopolitical tensions between Russia and Ukraine, fears over a recession, higher purchase of gold exchange-traded fund units, and purchase of gold by various central banks have led to the recent surge in prices, experts said. And given the global uncertainty, gold may continue to outshine other asset classes.

Joshi said since customers are getting 10% or more loan amounts for the same amount of gold, it makes sense for them to take less. “Customers borrow on the basis of their requirement, and not on the basis of what is available in terms of credit. We have seen customers borrowing even at 35-40% of their LTV even though we are okay to give them 75%.”

A higher LTV ratio reflects a borrower’s credit risk. At the same time, a higher LTV comes with a higher interest rate. Currently, gold loan rates are hovering between 7.2% and 20% or even more depending on the bank or non-banking financial institution.

“It is more likely for small businessmen to borrow more for their business needs. However, individual borrowers who use the funds for personal/emergency use may not necessarily look to borrow more immediately,” Manish Kothari, president and head — commercial banking, Kotak Mahindra Bank, said.

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Gold prices are likely to move higher as concerns over the global macroeconomic growth linger. Such a scenario will benefit both lenders and borrowers, say experts. “As gold prices rise, gold loans become attractive as a higher amount of credit is available against the same collateral. Consumers who have already taken a gold loan also stand to benefit from increased loan amounts, thanks to the higher value of their existing pledged collateral,” Deepak Singhal, senior vice-president — business, Rupeek, said.